Fraudulent chargebacks have become notoriously common in eCommerce. According to the Nilson Report, the total payment card volume is estimated to reach $79 trillion by 2030. Of that amount, approximately $49.32 billion will be lost to fraud activities.
Chargebacks can be filed for several reasons. This includes everything from errors made by the business to a customer’s dissatisfaction with the product/service. However, some customers misuse chargebacks to avoid returning the product while seeking a full refund, and bad players use them to steal from businesses. Either way, businesses have to suffer losses, financial and otherwise.
“Merchants lose an average of $3.75 for every $1 lost to chargebacks.”
— Source: LexisNexis
This blog explains everything you need to know about chargeback fraud: their types, how they affect your business, and how you can effectively fight them with cryptocurrency. If that sounds exciting, let’s get going.
Chargeback fraud occurs when a customer deliberately disputes a charge on their credit/debit card to receive a refund on a recently purchased product or service. The customer may falsely claim that the product was unsatisfactory or that the transaction was unauthorized. Let’s look at a few types of chargeback frauds.
Today, friendly fraud is reportedly one of the most common attacks merchants face. Except for the name, there’s nothing friendly about it. This occurs when a customer purchases a product but later disputes the charge, claiming the transaction was unauthorized/fraudulent or the product/service was not as described.
Return fraud generally occurs when a customer returns a perfectly working product to the merchant, claiming it is faulty, defective, or unsatisfactory.
Virtual product fraud happens when a customer disputes a charge for any digital goods or services they purchased earlier. It could be an online course, a software license key, or a computer program. For businesses, it’s hard to fight the chargeback as the customer may have already downloaded the software or used the license key — but they cannot know for sure.
When a customer disputes a recurring subscription charge, it can be considered subscription fraud. In this case, the customer may use the service for several months at no cost and then claim a refund, stating that they did not authorize the transaction or canceled the subscription earlier.
Chargebacks can adversely affect your business’s growth and profitability. Here are a few consequences of fraudulent chargebacks on your business:
“By 2023, the average cost of a single chargeback is expected to be $190, based on a $90 average transaction value.”
Source: Chargebacks911, 2022 Chargeback Costs
Chargebacks hurt businesses financially. When a customer disputes a transaction, it is reversed back to their account. This means the merchant has to bear the cost of a product, shipping charges, and inventory expenses — all by himself.
That’s not all.
Merchants also have to pay chargeback fees to banks and credit card companies. The fees are levied to penalize them as the bank views chargeback requests as a sign of ill practices. Chargeback fees could range between $20 to $100 — depending on the merchant’s agreement with the company and their previous track record.
To conduct payments, businesses have to pay transaction fees and platform charges on a regular basis. A chargeback fee is simply an addition to the huge sum of money they are already paying to giant financial institutions and banks.
Merchants also endure reputational damages due to chargebacks. When multiple chargebacks are filed against a particular merchant, his account gets flagged, and he may be suspended from the platform. This means he will no longer be able to process a certain credit card or use a particular payment gateway. Thus, chargebacks not only affect a merchant’s business but also their reputation.
When several chargebacks are processed against a merchant, he is categorized as a high-risk user. Such businesses pay higher transaction fees, have longer payment processing times, and risk losing their funds if the payment processor decides to freeze their account. Ultimately, this can cost the merchant a significant revenue loss.
While you can take many preventive measures to avoid chargebacks, you have little to no control over them. The customer can raise a chargeback any time, and credit card companies tend to favor them in most cases.
How can you effectively fight chargebacks, then? By embracing crypto payments. Let’s understand more.
Merchants can get rid of chargebacks entirely by enabling crypto payments across their online and offline channels. That’s because crypto transactions are instant, anonymous, and irreversible. The only way a transaction can be reversed is when you choose to send it back to the customer. Cryptocurrencies give you full control over your funds. If a customer requests a refund, you will have a choice — whether to process a refund or retain the funds. Let’s look at the additional advantages of accepting cryptocurrencies.
The average credit card processing fees range between 1.5% and 3.5% for domestic transactions. That’s not all. For global payments, credit card companies levy foreign transaction fees on top of existing charges, which can be as much as 3% or more, depending on the transaction type. Over time, merchants have paid over $78 billion as processing fees to credit card giants.
On the contrary, cryptocurrencies are cheaper to process as there are no intermediaries required to verify the transactions. Average transaction fees for crypto payments range between 0 to 1%. That’s significantly cheaper than other payment methods. With cryptocurrencies, you can effectively save 2 to 5 percent fees on each transaction. Compound that for years, and you will realize how much you can save in the long run by enabling crypto transactions.
Credit card transactions are highly monitored and regulated by giant financial institutions. They can intercept or reverse any transaction that they deem suspicious. That’s not how crypto transactions work. They are peer-to-peer and decentralized. This means no one can freeze your funds or reverse any transactions on your behalf. You can send and receive payments anywhere in the world at any time. No bureaucracy. No dictatorship. No governance. With cryptocurrencies, it’s you who is in control of your money.
Credit card transactions can take up to four business days to settle into your account. In case of public holidays or weekends, settlements can take even longer. That’s not all. For international payments, the settlement time may vary from a few days to several weeks — depending on the transaction type.
Crypto payments, however, can be settled almost immediately. Doesn’t matter if you are running a local coffee shop or collecting international payments; all the transactions will be settled in real time. Thus, when you are accepting cryptocurrencies, you will always have your funds at your disposal.
Blockchain is a publicly distributed ledger. Thus, all the transactions can be traced back to their origin via a blockchain explorer. You can also check incoming and outgoing transactions associated with a wallet through its address. This makes cryptocurrencies transparent, trustable, and neutral. No single entity can control or manipulate transactions or inflate the currency as it is cryptographically secure.
Fraudulent chargebacks are eating up a significant chunk of revenue from online merchants. According to a report from , the total cost of eCommerce fraud to merchants is expected to exceed $48 billion globally in 2023. With giant financial organizations commanding your transactions, getting ahead of them is almost impossible.
Crypto can be a potential solution to combating fraudulent chargebacks. All the transactions via blockchain are fast, instant, and irreversible. with Speed today to start accepting global crypto payments in real-time. Being one of the most reliable and efficient Bitcoin payment processors, Speed is trusted by thousands of businesses worldwide for collecting crypto payments from their customers. with Speed to test its modern and useful payment collection features.
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